OTTAWA - Canadian inflation resumed tracking lower last month after an extraordinary spike in July that accompanied increases in sales taxes in three provinces.

Statistics Canada said Tuesday that consumer prices edged down one-tenth of a point to an annualized rate of 1.7 per cent in August from last year, and were also 0.1 of a percentage point lower than in July.

The news sent the Canadian dollar slightly lower, an indication markets are pricing down the likelihood that Bank of Canada governor Mark Carney will hike interest rates next month.

"The mild data for August should reinforce the case for a pause by the Bank of Canada," said economist Krishen Rangasamy of CIBC World Markets.

"The main concern at this point is a flagging U.S. economy and if, as we expect, Canadian growth suffers as a result ... that should have the Bank of Canada stay put on rates until spring of next year."

Carney began hiking rates in June, taking the central bank's trendsetting policy rate from 0.25 per cent to one per cent in three consecutive hikes.

But the economy has significantly underperformed Carney's expectations since the first quarter, and analysts believe growth is continuing to slow.

Inflation is also starting to track lower than the central bank's estimates.

While headline inflation is relatively close to the central bank's two per cent target, that level is not indicative of the underlying downward pressure on prices.

Statistics Canada estimates the introduction of the harmonized sales tax in Ontario and British Columbia and an increase in the tax in Nova Scotia in July likely added 0.7 per cent to the national rate — more so in the impacted provinces — an effect that will be seen for a full year.

That means if that special, one-time factor were removed, annual inflation would be about one per cent, where it stood in June.

A truer measure of inflation is the underlying core index, which excludes volatile items and the HST. Core remained at a 1.6 per cent annualized rate last month, well below the central bank's two per cent target, and below the bank's estimate for the third quarter.

Douglas Porter, the Bank of Montreal's deputy chief economist, said there is a bigger danger of deflation than inflation in Canada.

"Deflation has been the bigger risk for the industrialized economies for some time now and to some extent that's even true in Canada," he said.

"The reality is our inflation numbers are not materially different from those in the U.S."

Porter said excess capacity in the economy and continued high unemployment, which at 8.1 per cent is about two points above pre-recession levels, should keep the lid on price gains.

The HST-effect was evident in the regional breakdown, with Ontario's inflation topping the country at 2.9 per cent, British Columbia leading the western provinces with a 1.5 per cent rate and Nova Scotia at 1.7, the national average.

Overall, prices rose in seven of the eight components tracked by the agency, led by energy prices with a five per cent gain. More specifically, electricity rose 7.7 per cent, home purchase prices increased 5.5 per cent, car insurance was up 5.1 per cent, and restaurant meals increased 2.5 per cent.

Food prices also strengthened to a 1.6 per cent gain last month, following a 1.1 per cent pick-up in July, and prices associated with health and personal care rose 3.5 per cent.

The major deflationary influences were clothing and footwear, which declined 2.2 per cent, home mortgage costs, which declined 3.8 per cent, fresh vegetables, which dipped 4.2 per cent and air travel, which fell two per cent.

Manitoba had the country's lowest inflation rate among provinces at 0.3 per cent.